HUD vows to continue fight against illegal settlement fees

THE BUSH administration sent a shot across the bow of the home mortgage settlement industry last month: Cut out illegal kickbacks, overcharges and other anti-consumer practices at real estate closings or face steep penalties - even prison time - under federal law.

The administration is backing up its warning by tripling the staff and budget at the offices within the Department of Housing and Urban Development (HUD) that investigate complaints about settlement cost abuses. It is also contracting with outside professional investigators including FBI veterans to track down violators, and it is making heavy use of state attorneys general and banking regulators.


"We are serious," said Federal Housing Commissioner John C. Weicher in an interview. "We are committed to vigorous enforcement of the law."

To underline his point, HUD announced four new settlements with companies alleged to have been involved in kickback schemes ranging from back-door referral payments to sham corporations designed to siphon money out of homebuyers' title premium payments.


In one case, a Tennessee-based firm,, created "dozens of sham title companies for the purpose of paying kickbacks to real estate and mortgage brokers in five states for the referral of title business," according to HUD. The companies were "bogus," said the agency, with few or no employees, and "did little or no title work while collecting 80 percent of title insurance premiums paid by borrowers."

Though TitleVentures admitted no wrongdoing as part of the settlement, it agreed to shut down 36 affiliated title companies and to pay a federal fine.

Industry experts consider sham corporations one of the most pervasive - but difficult to detect - consumer rip-offs. The typically work like this: Since most homebuyers or refinancers follow the recommendations of their mortgage brokers or realty agents regarding choice of title insurance and settlement agents, such referrals can be turned into money.

Say a mortgage broker has the choice of sending his borrowers to either Title Insurance Agency A or Title Agency B. But Title Agency A proposes creating a dummy corporation - dubbed Title Services LLC - that will be controlled by the broker. Out of each settlement of a home purchase referred by the broker, Title Services LLC will receive $500 from the closing proceeds. The fee will even be listed on the "HUD-1" settlement sheet and appear to be for legitimate title work. But in fact there will be no work, just a naked kickback.

Federal rules permit title agencies to have "affiliated business" arrangements with realty agents, mortgage brokers and others, provided the affiliates have independent employees, do actual title work, maintain separate office space and earn a substantial portion of their total revenues from sources independent of the title agency.

You can't just create a fictitious company on paper and send it kickbacks. But that's what sham corporations do, at great profit. A broker who takes $500 out of 125 referrals a month can rake in $62,500 in illegal fees every four weeks. Over the course of a year, that comes to $750,000.

In the interview, Weicher warned the settlement industry about still another controversial practice: so-called "upcharges" on closing fees.

Upcharges are essentially add-ons where no services or goods are provided to justify the extra cost.


For example, say your credit check cost the mortgage company $15, but the charge to you on your settlement sheet reads $65. Since no additional services were rendered to justify the $50 surcharge, that is illegal, at least in the view of HUD.

Several federal appellate courts, however, have disagreed with HUD's view of settlement-cost add-ons, leading some mortgage and title firms to believe the agency no longer will prosecute such cases.

Wrong, said Weicher.

"We still believe [upcharges with no services] violate the law," and the department is pursuing multiple cases against firms that violate the rule - even within the appellate court jurisdictions that have ruled against HUD.

What should homebuyers and refinancers take from all this?

Most important: Be aware that settlement fee-padding and kickbacks still represent major problems. Ask what specific services were performed by companies listed on your settlement sheet with whom you had no contact.


And look hard for disclosures of "affiliated business" arrangements among mortgage brokers, realty agents, title companies and appraisers. Many of these relationships may well pass federal smell tests and be legitimate. But others may simply be shells for funneling kickbacks.

If you think you can document something fishy - or you are in the real estate business and see competitors ripping off consumers in settlements - contact HUD, Attn: RESPA, Room 9146, 451 7th St. SW, Washington, D.C. 20410.

Ken Harney's e-mail address is